A scholarly article for lawyers

Tharrington Smith partner Douglas E. Kingsbury authored the following article, which was published in the June 8, 2010 issue of the North Carolina Bar Association’s Criminal Justice newsletter, True Bill.

In most trials, witnesses testify about facts, and the judge instructs on the law. This principle has its roots in the common law, and is adhered to in federal courts across the country. See United States v. Oliveros, 275 F.3d 1299, 1306-07 (11th Cir. 2001), citing Charles Alan Wright, 2A Federal Practice and Procedure Criminal § 432 (4th ed.).

Criminal tax trials, however, are often not like “most trials.” This is particularly so when they involve nuances of the Federal Tax Code, as does nearly every criminal tax case. Even the most basic tax evasion case requires the government to prove that there was a tax deficiency, meaning that, under the law, the defendant either underreported his taxable income, or overstated his lawful deductions. How does the jury know whether the law requires a particular item to be included in taxable income, or whether the law permits a particular deduction? Who informs the jury about the proper tax treatment of a particular transaction? And what if, under the tax laws, there are competing views of the matter, or worse yet, there is no clear answer at all?

In many criminal tax trials, the jury learns about the tax laws, not from the judge, but from two other sources: the government’s “expert” witness, and the government’s “summary” witness. Although courts sometimes confuse the roles of each of these witnesses, and consequently mix the different rules applicable to each, an “expert” witness and a “summary” witness are not the same thing. This article looks at each of these witnesses, and discusses ways in which defense counsel can try to neutralize their impact on the trial.

The “Tax Expert”“It is well settled in several circuits that ‘expert testimony by an IRS agent which expresses an opinion as to the proper tax consequences of a transaction is admissible evidence.’” United States v. Hatch, 514 F.3d 145, 165 (1st Cir. 2008), quoting United States v. Windfelder, 790 F.2d 576, 581 (7th Cir. 1986). Of course, in opining as to the proper “tax consequences” of a transaction, the expert tells the jury what the tax law is, what the taxpayer was required to do under the tax law, and essentially, how the taxpayer’s conduct violated the law.

Courts have placed three basic limitations on this extraordinary departure from the common law rule that the jury takes the law only from the judge.

First, the expert must testify based on facts in evidence. United States v. Fogg, 652 F.2d 551 (5th Cir. 1981). Essentially, this means that like that of any expert, the opinion has to be based on facts that have been presented at trial.

Second, the expert cannot opine as to the defendant’s state of mind when state of mind is an essential element of the offense. United States v. Mikutowicz, 365 F.3d 65 (1st Cir. 2004). See also Fed.R.Evid. 704(b). In other words, the expert cannot testify that in his opinion the defendant intended to evade or defraud, or that in his opinion the defendant knowingly understated his tax liability. United States v. Windfelder, 790 F.2d 576 at 582 (7th Cir. 1986).

The third limitation is more tacit. Even though it is clear that the witness is telling the jury what the tax law is, the government’s expert will not openly say, “the tax law is . . .” or, “the tax law requires. . .” or “under the tax law. . .” Couching the opinion in those terms may draw a sustainable objection. Instead, the witness will simply say, “that expense was not deductible on the defendant’s return,” or, “this transaction generated a capital gain which should have been reported on the defendant’s tax return,” or, “the defendant’s ‘non-grantor’ trust is actually a ‘grantor’ trust, and therefore all of the income and gain generated was taxable to the defendant personally.”

The “Summary” WitnessThe second member of the government’s “dynamic duo” in these cases is the summary witness. Typically this witness will be an IRS agent, but occasionally the government will use a CPA or a forensic accountant. The summary witness will usually prepare a chart or diagram which utilizes the government’s theory of the case to calculate and depict the defendant’s tax liability. To make the calculations, the witness applies his views of the tax laws, including whether a transaction is taxable, whether an expense is deductible, and so forth.

Courts routinely permit the summary witness to present these opinions of the tax law. See, e.g., United States v. Stierhoff, 549 F.3d 19 (1st Cir. 2008), citing United States v. Pree, 408 F.3d 855, 869 (7th Cir. 2005) (“The key to admissibility is that the summary witness’s testimony does no more than analyze facts already introduced into evidence and spell out the tax consequences that necessarily flow from those facts.”).

Often, the summary witness is qualified as an “expert.” United States v. Sabrino, 274 F.3d 1073 (6th Cir. 2001). Courts have held, however, that in tax evasion cases, it is not necessary for a summary witness to be qualified as an expert. United States v. Stierhoff, 549 F.3d 19 (1st Cir. 2008). Usually the trial court will provide a limiting instruction which informs the jury of the purpose of summary testimony and that the summary itself does not constitute evidence. The court then permits the summary witness to “summarize and analyze the facts indicating willful tax evasion, so long as [the witness] does not embrace the ultimate question of whether [the defendant] did intend to evade income taxes.” United States v. Sabrino, 274 F.3d at 1067.

How to Deal With the “Expert” and “Summary” Witnesses in Criminal Tax Prosecutions1. Utilize the Special Discovery Provisions of Fed.R.Crim.P. 16(a)(1)(G)Dealing with “expert” and “summary” witnesses begins with finding out what they are going to say at trial. As criminal practitioners know, finding out in advance what the government’s witnesses are going to say at trial is no easy task.

This is not so, however, in the case of the government’s expert witnesses in criminal tax cases. Fed.R.Crim.P. 16(a)(1)(G) allows the defendant to discover precisely what these witnesses are going to say:

Expert witnesses. At the defendant’s request, the government must give to the defendant a written summary of any testimony that the government intends to use under Rules 702, 703, or 705 of the Federal Rules of Evidence during its case-in-chief at trial. If the government requests discovery under subdivision (b)(1)(C)(ii) and the defendant complies, the government must, at the defendant’s request, give to the defendant a written summary of testimony that the government intends to use under Rules 702, 703, or 705 of the Federal Rules of Evidence as evidence at trial on the issue of the defendant’s mental condition. The summary provided under this subparagraph must describe the witness’s opinions, the bases and reasons for those opinions, and the witness’s qualifications.

Serving a specific Fed.R.Crim.P. 16(a)(1)(G) discovery request on the government accomplishes several things. First, it allows the defense to discover the opinions it must prepare to meet at trial. Second, it forces the government and its experts to commit to a position before trial. Third, it allows the defense to develop expert testimony of its own to present in the defendant’s case.

There is one peculiarity about Fed.R.Crim.P. 16, however, regarding expert testimony and reciprocal discovery. If the defendant requests discovery under Fed.R.Crim.P. 16(a)(1)(G), and the government complies, then pursuant to Fed.R.Crim.P. 16(b)(1)(C), the defendant must likewise provide expert discovery to the government upon request. However, if the defendant elects not to request discovery under Fed.R.Crim.P. 16(a)(1)(G), he has no obligation to provide reciprocal expert discovery to the government. Roy Black made just such an election in his successful defense of Indy race car driver Helio Castroneves. United States v. Castroneves, et al., Case No 08-20916-DR-Graham-Torres (S.D. Fla. 2009). From pre-trial meetings with the government, Black already had a good idea of what the government’s experts were going to say. He was, therefore, willing to forego the advantages of having the government’s expert reports in hand in order to be able to present his own experts at trial sight unseen by the government.

2. Hire a Defense Expert to help with Cross-ExaminationHaving a qualified tax expert with whom the defense can consult is often essential to mounting a successful challenge to the government’s experts. The tax code is an enormous and complex compilation of statutes and rules, and there is much disagreement over their proper interpretation and application. That is the reason that thousands of cases that are filed every year in the United States Tax Court.

The first area in which a qualified tax expert can assist the defense is in preparation of an effective cross-examination. The importance of effectively cross-examining the government’s expert in a criminal tax case was underscored by the United States Supreme Court in United States v. Johnson, 319 U. S. 503, 519 (1943). In Johnson, the government expert calculated what he contended to be the defendant’s actual tax liability. As in nearly all such calculations, the expert utilized his own interpretation of the tax laws and assumed certain facts, some of which were in dispute. In holding that the expert’s opinions did not invade the province of the jury, the court noted that, in essence, the jury is free to accept or reject the expert’s testimony:

The worth of our jury system is constantly and properly extolled, but an argument such as that which we are rejecting tacitly assumes that juries are too stupid to see the drift of evidence. The jury in this case could not possibly have been misled into the notion that they must accept the calculations of the government expert any more than that they were bound by the calculations made by the defense’s expert based on the defendants’ assumptions of the case. So long as proper guidance by a trial court leaves the jury free to exercise its untrammeled judgment upon the worth and weight of testimony, and nothing is done to impair its freedom to bring in its verdict and not someone else’s, we ought not be too finicky or fearful in allowing some discretion to trial judges in the conduct of a trial and in the appropriate submission of evidence within the general framework of familiar exclusionary rules.

One way a tax expert can help the defense prepare for cross-examination is by identifying relevant provisions in the tax code that are unclear or about which tax experts disagree. Another way is to point out factual assumptions upon which the government expert’s opinion turns. Some of those facts may be in dispute, and others may not be “in evidence” at all. Remember, the government expert’s opinions must be based on facts in evidence. United States v. Fogg, 652 F.2d 551 (5th Cir. 1981).

In addition, the defense expert can alert the defense to case law that is directly contrary to the government expert’s opinion. Resist the temptation to cross-examine the government’s expert on the specifics of such cases, however. The government is sure to object, and the district court will likely sustain the objection. See, e.g., United States v. Mikutowicz, 365 F.3d 65 (1st Cir. 2004). The better practice is to save the point for your own expert. If the government challenges him on cross-examination, it will have opened the door, thereby allowing your expert to cite the supporting case law and details.”

3. Presentation of Expert Tax Testimony in the Defense CaseSince the tax expert’s opinion must be based on the facts in evidence, the defense’s testifying expert should be present in the courtroom for the entire trial. The district court routinely permits an expert’s presence as an exception to any witness sequestration order that might be in effect.

Once it is the defense expert’s turn to testify, there are several things the expert can accomplish for the defense. In nearly every case, this will include trying to neutralize the government’s experts. To this end, defense counsel will want to show the jury that the defense expert is no less qualified than the government’s expert to opine on the proper tax treatment of the transaction at issue. Beyond that, there are at least three ways in which the expert can effectively assist the defense case.

A. Challenging the Government Expert’s Determinations

The defense expert should take each of the opinions of the government expert with which he disagrees, and logically explain why he disagrees with them. It is important to realize that the defense does not have to “win” this battle of the experts. If the jury accepts that there is a legitimate dispute over the proper tax treatment of a transaction, the jury will have a difficult time finding that the government has proved the existence of a tax deficiency. More importantly, because “willfulness” is defined as an intentional violation of a known legal duty, if the tax experts cannot agree, it becomes much more difficult for the jury to find that the defendant acted “willfully.”

B. Opining that the Defendant’s Mistaken Belief was ReasonableThe Supreme Court has held that a subjective good-faith misunderstanding of the law or a good faith belief that one is not violating the law can negate the statutory willfulness requirement of most criminal tax offenses. Cheek v. United States, 498 U. S. 192, 111 S. Ct. 604, 112 L.Ed.2d 617 (1991). The question of whether the defendant believed in good faith that he was not violating the tax law is for the jury.

Expert testimony on the reasonableness of a defendant’s belief that he was not violating the tax laws has been held to be “highly relevant to the [jury’s] assessment of whether [the defendant] willfully violated the tax laws.” United States v. Lankford, 955 F.2d 1545 (11th Cir. 1992). In Lankford, the defendant testified that he thought his tax treatment of certain political contributions was allowed under the tax laws, and he offered an expert to testify as to the reasonableness of that belief. The district court sustained the government’s objection to the expert’s testimony. In reversing, the circuit court stated:

Expert testimony of the reasonableness of Lankford’s belief would be highly relevant to the assessment of whether Lankford willfully violated the tax laws. Thus, the critical issue here is whether, under facts such as those presented to the jury, it is reasonable for a political candidate to treat certain monies received during a campaign as political contributions, while treating other monies as gifts donated to assist him with living expenses incurred during the campaign. Most jurors would simply lack the specialized knowledge, background, and experience needed to assess the reasonableness of the gift/income tax interpretations unique to a candidate’s finances during a political campaign, particularly where the candidate must resign his existing position in order to run for office.

The gift/income tax opinion of the defense’s expert witness could have had a powerful impact on the issue of Lankford’s willfulness, the critical element in Lankford’s defense to Count 24. Lankford testified that he believed the $1500 check was a gift that was not taxable; his expert’s testimony revealed that a legitimate and well-founded legal analysis would have supported the reasonableness of that belief. By disallowing expert testimony on the gift/income issue, the trial court deprived Lankford of evidence showing that his asserted state of mind was reasonable. Accordingly, we hold that exclusion of expert testimony on this issue was error.

955 F.2d at 1551.

An expert’s testimony as to the reasonableness of the defendant’s belief has been found to satisfy the relevancy standard of Fed.R.Evid. 401 “because it made the existence of [the defendant’s] belief . . . more probable than it would have been without the evidence.” United States v. Onumonu, 967 F.2d 782, 787 (2nd Cir. 1992).

C. Explaining that the Law in this Area is Unclear or UnsettledEven if the government has the better of the argument, the very fact that there is a legitimate dispute over the proper tax treatment of a particular transaction can lead to an acquittal.

“When the taxability of unreported income is problematical as a matter of law, the unresolved nature of the law is relevant to show that defendant may not have been aware of a tax liability, or may simply have made an error in judgment.” United States v. Garber, 607 F.2d 92, 98 (5th Cir. 1979), citing Nordstrom v. United States, 360 F.2d 734 (8th Cir.), cert. denied, 385 U. S. 826, 87 S. Ct. 59, 17 L. Ed. 2d 63 (1966) (district court erred in excluding testimony of defense tax expert that a recognized theory of tax law supported the defendant’s views, thereby depriving the defendant of evidence showing her state of mind to be reasonable). Thus, expert testimony as to the uncertainty of the tax law in a particular area is not only admissible, but highly relevant to the essential element of willfulness. See also United States v. Harris, 942 F.2d 1125 (7th Cir. 1992) (taxpayer is allowed to look at reported cases with analogous fact patterns when trying to determine his or her liability. If a series of such cases favors the taxpayer’s position, taxpayer has not been put on notice that he is in danger of crossing line into criminality by adhering to that position) and United States v. Pirro, 212 F3d 86 (2nd Cir. 2000) (affirming dismissal of false tax return count where government’s sole support for its interpretation of tax law was civil cases that were distinguishable).

An issue arises as to whether, to be admissible, the defendant must introduce evidence that he was aware of and relied upon authority for his position. Some courts have taken the view that willfulness is “personal,” and in order for the defendant to take advantage of an uncertainty in the law, he must first show that he was confused or otherwise relied upon some authority in taking his position. United States v. Curtis, 782 F.2d 593 (6th Cir. 1986). Other courts have held that the relevance of a dispute in the tax law does not depend on whether the defendant actually knew of the conflict. United States v. Garber, 607 F.2d at 98, citing United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974).

In United States v. Critzer, the Fourth Circuit Court of Appeals took the principal one step further. There, the court flatly held that where the tax law is vague or highly debatable, then as a matter of law, the defendant lacks the requisite intent to violate it. The court reaffirmed this holding in United States v. Mallas, 762 F.2d 361 (4th Cir. 1985), stating that where the tax treatment at issue raised novel questions of tax liability and experts on both sides offered plausible support for their positions, “the appropriate vehicle to decide [the issue] of tax liability is the civil procedure of administrative assessment, not a criminal prosecution.” Id., at 497.

If the applicable tax law is unclear or unsettled, the defense should always proffer expert testimony to establish the ambiguity. Even if the court denies a motion to dismiss or a judgment of acquittal, the same evidence may compel a verdict of not guilty. In its judgment of acquittal entered in United States v. Armstrong, Case No. 5:09-CR-54-1-FL (E.D.N.C. July 17, 2009), the district court noted:

“Expert testimony was received from both sides as to the tax consequences of the trust structure and transactions utilized by defendant. The experts’ conflicting opinions about the proper characterization of the transactions, including whether defendant had a reportable interest in or signature or other authority over a financial account in a foreign country, also militated against a finding beyond a reasonable doubt that defendant acted willfully. These highly skilled and credible professionals came to very different determinations as to the plan documents and consequences of the actions of this defendant.”

Summary

The use of expert witnesses and summary witnesses in criminal tax trials presents somewhat of an anomaly in trial practice. For years, the government has been permitted to use these witnesses to present the government’s views of the tax law, and to explain to the jury how the defendant’s conduct violated the law. With thoughtful preparation, the defense can not only meet the government’s presentation, it can turn the tables by using its own experts to establish the basis for an acquittal.

Doug Kingsbery is a partner at Tharrington Smith, L.L.P. in Raleigh, and is the former chair of the Criminal Law Specialty Committee of the North Carolina State Bar. His criminal law practice focuses on defense of criminal tax investigations and prosecutions, as well as other white-collar criminal cases. For more information about Doug Kingsbery and his practice, visit http://nccriminallawyer.com, or e-mail dek@tharringtonsmith.com.

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